I was a member of a startup team for a technology company that eventually went public. Our company specialized in tools that made creating, modifying, and managing DB2 databases which was invented and owned by IBM. Our company ONLY focused on DB2 and nothing else. If you were an investor at the time and you thought DB2 was a winning technology, you couldn’t invest in IBM since they have so many other technologies and services that could affect their overall stock results. The only way to invest directly in DB2 was to invest in our company. The investment analyst called this a “pure play” investment in DB2.
This idea of a pure-play investment in a technology is exactly the kind of investment that an Initial Coin Offering (ICO) delivers. If you believe in the future of an idea, participating in an ICO that showcases the path to realizing the technical manifestation of that idea means that if that technology is a big success, the value of your investment in the associated ICO will rise along with that success. Further, as the technology gets developed and begins operation, the value sustenance of the coin stays entirely inside of the realm in which the technology operates. Due to the direct link between the investment and the related technology, the Coin that you buy is more like a “paid API token” than a unit of currency. Tokens are used to both operate inside the ICO’s Blockchain and/or purchase whatever the Blockchain is delivering.
I suspect that it isn’t only the idea of a pure-play investment that is driving the ICO frenzy, in fact, that is probably assuming too much sophistication on the part of the average investor. Due to the unregulated nature of ICO’s (i.e., you don’t have to register with the SEC or any other government agency before launching an ICO) means that there are no formal rules governing the offering. One of the big differences is that an individual does not have to be a “qualified investor” to participate in an ICO. A qualified investor is someone who has a net worth of at least $1 Million and has signed a document that signifies that they understand the risk involved in early-stage investments. Or, to say it a different way, anyone can invest in an ICO no matter their net worth or their grasp of the risk involved. This gives ICO’s a possible investor base that is at least 100 times greater than the traditional technology financing base in the United States. It opens the possibility of having investors from any part of the world, from any walk of life. And, since for many of these novice investors, they are not exactly sure how to properly vet this type of investment, they are more trusting of the “wisdom of the crowd” as justification of their investment. The trap here is that the crowd sentiment these days is filled with as much hype as it is fact.
Also, ICO’s move the timing of larger-scale funding up much earlier in the lifecycle of a company. The time that it takes to write a well-written white paper, is the only “development” time a company needs and an ICO can follow shortly thereafter. Very little of the infrastructure of the company needs to be developed and, certainly, no operations or sales history needs to demonstrated. Sure, there are Angel Investors, Friends-and-Family investors, and, more recently, Crowdfunding, who will invest in a concept or because they know you, but the amount that these types of early investors are willing to invest in a promising idea is far less than the sums being raised via the ICO mechanism. The early results show ICO’s outpacing other forms of early investments by a factor of 1,000.
A good case study of all of these elements about an ICO is the recent ICO of a Blockchain called, Bancor which is overseen by the Bprotocol Foundation. Bancor had been pitched as a platform designed to make it easier for users to launch their own blockchain tokens. The Bancor, ICO set a new industry record, raising approximately $153 million in Ether, the native currency on the Ethereum blockchain, in June of 2017! The ICO attracted 10,885 buyers. The unbelievable notion about the Bancor ICO is that Bancor was just launched in 2017! To contrast this level of funding with a traditional funding scenario, a company would have had to have gone through four rounds of funding to get to a $150 million level of investment and it would have taken, at least, three years. The four rounds of funding would have been an Angel Investment, A-Round (approx. $2-$5 million), B-Round (approx. $30 to $50 million), and then a C-Round of $150 million. All along the way, the company would have had to been successfully executing to their business plan. As we see in the case of Bancor, with an ICO it is possible to raise $150 million a few months after publishing a white paper.
While there is a great deal of interest and just as much confusion surrounding ICO’s, just think if Apple had an ICO instead of venture funding? Imagine the value of the “Apple Coin” that you have held on to for all those years? And, you bought that coin when you were 18 years old and only had $100 to invest. But, back then, ICO’s didn’t exist, and the typical 18 year-old was not a qualified investor. ICO’s open the door to having projects funded (like open-source) that would never be funded any other way and give every person the option to become technology investors if they choose. So, it is up to you to decide if your “Pure Play” investment in an ICO is a “Sure Play” investment return.
Note: This article was published in ICO Crowd Magazine in the October 2017 edition.